ICICI Prudential Mutual Fund has launched an open-ended Exchange Traded Fund – ‘ICICI Prudential Alpha Low Vol 30 ETF’ that will track Nifty Alpha Low-Volatility 30 Index.

The new ETF of ICICI MF intends to counter the cyclical theory of single factor index structure strategy. Single-factor based index strategies, however, typically exhibit cyclicality and may underperform during certain market phases.

Nifty Alpha Low-Volatility 30 Index is an index that tracks a portfolio of stocks selected based on combination of 2 factors-Alpha and Low Volatility.

Considering the current pandemic driven prolonged subdued growth, ICICI Pru MF believes that ICICI Prudential Alpha Low Vol 30 ETF will provide investors a choice to take exposure to multiple factors through a single index product for creating wealth over the long term.

The index provides exposure to a portfolio of 30 stocks from various sectors, mainly that are a part of NIFTY 100 and NIFTY Midcap 50 which are selected on top combination of alpha and low volatility.

However, ICICI Prudential Alpha Low Vol 30 ETF has a high exposure to equity and is restricted to 30 stocks. It can be considered a high risk-return investment proposition. The fund is suitable for aggressive investors who are looking for a passively managed fund focusing on a mix of large cap and mid cap stocks. One should have an investment time horizon of 5 years or more.

Table 1: Details ICICI Prudential Alpha Low Vol 30 ETF

Type An open-ended Index Exchange Traded Fund tracking Nifty Alpha Low-Volatility 30 Index Category Exchange Traded Fund
Investment Objective The investment objective of the scheme is to provide returns before expenses that closely correspond to the total return of the underlying index subject to tracking errors.

However, there can be no assurance or guarantee that the investment objective of the Scheme would be achieved.
Min. Investment Rs 5,000 and in multiples of Re 1 thereafter Face Value Rs 10 per unit
Plans Nil Options Nil
Entry Load Not Applicable Exit Load There will be no exit load for units sold through the secondary market on the stock exchanges where the Scheme will be listed.
Fund Manager Mr Kayzad Eghlim Benchmark Index Nifty Alpha Low-Volatility 30 TRI
Issue Opens August 03, 2020 Issue Closes: August 10, 2020

(Source: Scheme Information Document)

How will ICICI Prudential Alpha Low Vol 30 ETF allocate its assets?

The asset allocation pattern of the scheme would be as follows:

Table 2: ICICI Prudential Alpha Low Vol 30 ETF’s Asset Allocation

Instruments Indicative Allocation (% to net assets) Risk Profile
Maximum Minimum High/Medium/Low
Equity securities of companies constituting the underlying index (Nifty Alpha Low-Volatility 30 Index) 100 95 Medium to High
Derivatives 5 0 Medium to High
Units of debt schemes, Debt and Money market instruments with maturity up to 91 days, TREPs# , Repo and Reverse Repo, # 5 0 Low to Medium
Units of debt ETFs 5 0 Low to Medium

#Or similar instruments as may be permitted by SEBI/RBI from time to time.
# Excluding subscription money in transit before deployment / payout
(Source: Scheme Information Document)

What will the Investment Strategy be?

The corpus of the Scheme will be invested predominantly in stocks constituting the underlying index in the same proportion as in the Index and endeavour to track the benchmark index. A very small portion of the fund may be kept liquid assets to meet the liquidity and expense requirements.

The Scheme may also use various derivatives and hedging instruments from time to time, as would be available and permitted by SEBI, in an attempt to protect the value of the portfolio and enhance Unitholders’ interest.

The performance of the Scheme may not be commensurate with the performance of the underlying index on any given day or over any given period. Such variations are commonly referred to as the tracking error.

The scheme intends to maintain a low tracking error by closely aligning the portfolio in line with the index. The stocks comprising the underlying index are periodically reviewed by Index Service Provider.

A brief of the Index

Nifty Alpha-Low Volatility 30 Index is designed to reflect the performance of a portfolio of stocks selected based on top combination of Alpha and Low Volatility. The index intends to counter the cyclicality of single factor index strategy and provides investors a choice to take exposure to multiple factors through a single index product. The Index consists of 30 stocks selected from NIFTY 100 and NIFTY Midcap 50.

Index Construction & Review Methodology

NIFTY100 Low Volatility 30 index would be considered as a child index as constituents of this index selected from a list of NIFTY 100 index. Child indices are defined as those indices where constituents are selected from a list of any other index.

Image: Sectoral composition of the index

(Source: NIFTY100 Low Volatility 30)

1. Stocks selection in the index:

  • Stocks are assessed on the basis of volatility for index inclusion
  • Volatility is calculated as the standard deviation of daily price returns (log normal) for last one year
  • Eligible stocks are then ranked based on their volatility score, with stock having lowest volatility getting a rank of 1
  • Top 30 ranked stocks with least volatility form part of the index

Table 3: Top 10 constituents of the Index by weight

Data as on July 31, 2020
(Source: NIFTY100 Low Volatility 30 factsheet)

2. Rebalancing in the index

The index is reconstituted on a quarterly basis in February, May, August and November. Volatility is calculated using closing prices of last one-year (adjusted for corporate actions) period ending last trading day of February, May, August and November for each review respectively.

At time of review, if the existing constituent of the index is ranked within top 60 based on the low volatility score, then the stock is retained in the index. Stocks based on lowest volatility rank gets included in the index, depending on the number of exclusions from the index due to above rule

Fund manager and his team under normal circumstances will endeavour that the tracking error of the Scheme does not exceed 2% per annum. The fund manager will create units and offer it for subscription as the Scheme will be listed on Stock exchanges, so that the investors can directly buy/sell in blocks from the Fund in ‘Creation Unit’ Size.

‘Creation Unit’ is a fixed number of Units of the Scheme, which is exchanged for a predefined basket of shares underlying the index called the “Portfolio Deposit” and a “Cash Component”. The facility of creating / redeeming units in Creation Unit size is available to the Authorised Participant and Investors.

The number of units, that investors can create / redeem in exchange of the Portfolio Deposit and Cash Component, is 18,000 Units and in multiples thereof.

Who will manage ICICI Prudential Alpha Low Vol 30 ETF?

ICICI Prudential Alpha Low Vol 30 ETF will be managed by Mr Kayzad Eghlim.

Mr Kayzad has earned a B.Com and M.Com as well as a Masters in Business Administration degree to his credit. He has been associated with ICICI Pru AMC since 2008. Prior to that, he has been associated with IDFC Investment Advisors Ltd, Prime Securities, and Canbank Mutual Fund.

Some of the other schemes Mr Enghlim has managed in the past are ICICI Prudential Nifty Index FundICICI Prudential Nifty Next 50 Index FundICICI Prudential Sensex ETFICICI Prudential Equity- Arbitrage Fund – Equity Portion, ICICI Prudential Nifty ETFICICI Prudential Nifty 100 ETF, and ICICI Prudential NV20 ETFICICI Prudential Midcap Select ETFICICI Prudential Equity Savings FundBHARAT 22 ETFICICI Prudential Sensex Index FundICICI Prudential Nifty Next 50 ETFICICI Prudential Midcap Select ETFICICI Prudential S&P BSE 500 ETFICICI Prudential Nifty Next 50 ETF and ICICI Prudential Midcap 150 ETF.

The outlook for ICICI Prudential Alpha Low Vol 30 ETF:

ICICI Prudential Alpha Low Vol 30 ETF is a passively managed exchange traded fund that will focus on replicating the underlying index, i.e. Nifty Alpha Low-Volatility 30 TRI. Notably, the index focuses on investing in top 30 stocks having low volatility (in the Nifty 100 and Nifty Midcap 50 index).

The basic intent behind launching ICICI Prudential Alpha Low Vol30 ETF, as quoted by Mr Nimesh Shah, MD & CEO, ICICI Prudential AMC in its press release is…

“ICICI Prudential Alpha Low Vol30 ETF is a multifactor smart beta strategy. This strategy addresses high sector concentration of single factor based index strategies through diversification of factor-risk exposures and exhibiting lower performance swings. Through this ETF, an investor gets access to smart beta strategy which is rule-based and cost-effective.”

In current environment of global economic slowdown, Exchange Traded Funds have gained some traction because stock picking has been difficult given the extreme volatility and uncertainty in the Equity markets.

In India, ETFs are slowly catching up with the global trend of investing in mutual funds. With most of the actively managed funds having underperformed in the last few years, passively managed ETFs have become an alternate choice for investors. Fund houses are making an attempt to provide more options for investors to choose from.

Being passively managed, the fund manager will not conduct any analysis on the stocks and will only try to mirror the index. So, the performance of ICICI Prudential Alpha Low Vol30 ETF will rely solely on the performance of the underlying index.

Table 4: Performance of the Underlying Index

Benchmark Absolute returns (%) CAGR (%)
3 Months 6 Months 9 Months 1 Year 3 Years 5 Years YTD
NIFTY 100 Low Volatility 30 Index – TRI 12.97 3.97 -0.28 8.65 7.10 8.89 3.16
NIFTY 100 12.15 -4.64 -6.85 1.10 2.54 5.35 -14.15
Nifty Midcap 50 14.15 -10.78 -8.77 -1.05 -4.01 4.29 -15.91

Data as on August 3, 2020
(ACE: MF; PersonalFN Research)

This article first appeared on PersonalFN here

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